Gordon Brown set the stage for modest pre-election tax cuts by maintaining an ultra-cautious approach to managing the public finances. Although the giveaway was bigger than expected, the chancellor kept a tight rein on the purse strings and appears to have kept plenty in reserve for next March's Budget, said City analysts.

The package of measures announced yesterday will initially cost £720m this year, rising to £2.6bn next year and £4bn in 2002-03, though cuts in duty on clean fuel and reductions in vehicle excise duty will eventually cost the exchequer another £1.75bn.

However, the chancellor has not yet redistributed substantial savings from rapidly falling unemployment and debt interest payments and economists said his forecast for tax revenues was still on the conservative side, leaving ample room for manoeuvre in the run up to polling day.

Despite yesterday's giveaway, the fiscal stance is forecast to be marginally tighter than predicted at the time of last March's Budget.

Instead of a surplus of £6bn in 2000-01, the chancellor has pencilled in one of £10bn. The City had expected a figure nearer £15bn.

For 2001-02, the surplus is estimated to be £6bn, £1bn higher than forecast in March, and the deficits in subsequent years are all predicted to be slightly smaller. The improved outlook for the public finances mainly reflects the buoyancy of tax receipts, which the Treasury estimates will be more than £4bn ahead of March's prediction, covering the initial cost of yesterday's giveaway.

Money has been put aside for the additional costs of the proposed transport measures, still subject to consultation.

While acknowledging that income tax, national insurance contributions and North Sea revenue will all be ahead of expectations, the Treasury reckons that corporation and capital gains tax will yield less.

But analysts said that by erring on the side of caution the chancellor could be pleasantly surprised by the amount of money at his disposal in the spring.

"They still look quite cautious on tax receipts... there is a lot of uncertainy and they could easily come in stronger," said David Walton, senior economist at Goldman Sachs, the US investment bank.

The Treasury suspects that the switch to a new system of quartlery instead of annual corporation tax payments artifically boosted revenue in the first half of the year. It is anxious not to make a mistake of assuming the gains are permanent.

"I think he is being a little cautious on next year's fore cast for the surplus, which is appreciably below the market forecast but I think that just reflects the normal Treasury caution," said Mark Ramsden, of Stone & McCarthy.

With the fiscal stance remaining tight, few economists expected the Bank of England to react by raising interest rates at the end of its monthly meeting today.

Jonathan Loynes, of the consultancy Capital Economics, said: "He seems to have done virtually everything that people were hoping for. All of the various groups - pensioners, drivers and road hauliers - seem to have got something. But the beauty is that he has kept the projected path for borrowing as it was in the Budget, if not slightly tighter.

"So I don't think there will be any costs in terms of higher interest rates. We've been of the view for some time now that rates have peaked at 6% and I would stick by that. The fact that the fiscal stance is at least as tight or if not tighter than was projected in the Budget means that the monteray policy committee won't have anything to be concerned about on the inflation front."

Both of Mr Brown's fiscal rules - keep the debt to GDP ratio stable below 40% and borrow only to invest - are met with ease.